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1993 (1) TMI 67

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..... of this court in CIT v. Ithappiri and George [1973] 88 ITR 332 and the decisions following the same, taking the view that the individual shares of partners in losses also should be specified in the partnership deed, to enable registration under section 184 of the Income-tax Act, would apply even in cases where minors are not admitted to the benefits of partnership and there are indications to show that the partners are to share equally. It was also felt that the matter requires reconsideration in the light of later decisions of the Supreme Court in Mandyala Govindu and Co. v. CIT [1976] 102 ITR 1, and the Full Bench decision of the Andhra Pradesh High Court in CIT v. Krishna Mining Co. [1980] 122 ITR 362. We make it clear that we are not concerned in this case as to what will happen if, in a particular case, minors are admitted to the benefits of partnership and the individual losses of the partners are not specified in the partnership deed. We leave that aspect open. Relevant facts. - Income Tax Reference No. 49 of 1982 is at the 'instance of an assessee under the Kerala Agricultural Income-tax Act, 1950, which is a firm constituted by an instrument of partnership dated January .....

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..... ed January 6, 1959, stipulated that the net profit shall be divided among the partners and the division was to be made in equal shares. It was also submitted that the books of account would reflect division in the above manner. Reliance was placed on the provisions contained in section 13(b) of the Indian Partnership Act, 1932. It was contended by the assessee that, in the absence of a different profit sharing ratio stipulated in the partnership deed, the partners shall share the profit/loss equally. Rejecting the objections raised by the assessee, the Commissioner of Agricultural Income-tax held in his order dated August 6, 1981, that the order passed in the revision petitions for the years 1961-62, 1962-63 and 1963-64 was not binding for the other assessment years, that there was no mention regarding the capital allotted to each partner though there is a stipulation that the net profit should be divided among the partners and that as specification of shares in the partnership deed is a condition precedent to granting registration and for allowing the application for renewal of registration, the registration and renewal granted to the assessee were wrong. It was further held tha .....

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..... ferred. Since the reference order of the Bench covers only one question, namely, the sole question referred in I.T.R. No. 49 of 1982 which is the same as question No. 1 in the other I.T.Rs., it is only that question which is being considered in this judgment. Income-tax References Nos. 10 and 11 of 1987 are at the instance of an assessee under the Income-tax Act, 1961. They relate to the assessment years 1978-79 and 1979-80. The assessee-firm consisting of two partners was formed under a partnership deed dated February 28, 1977, with effect from January 1, 1977, in the name and style " Kerala Publicity Bureau ". While the head office of the partnership was at Ernakulam, it had a branch office at Kottayam. Clause 10 of the instrument of partnership provided that the net profit of the firm, after usual business outgoings, shall be shared by the two partners. The whole of the profit of the Ernakulam office was set apart to the share of Sri Kuriakose, one of the partners and the whole of the profit of Kottayam branch to the share of the other partner, Sri Philipose. It is the above partnership deed which is relevant for the assessment year 1978-79. Later, the two partners executed .....

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..... e assessee, the following question is referred in I.T.Rs. Nos. 10 and 11 of 1987. " Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee-firm is not entitled to registration ?" The relevant provision regarding the registration of a firm under the Kerala Agricultural Income-tax Act, 1950, reads as follows : "Section 27. Procedure in registration of firms. - (1) Application may be made to the Agricultural Income-tax Officer-on behalf of any firm constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purpose of this Act and of any other enactment for the time being in force relating to agricultural income-tax or super-tax. (2) The application shall be made by such person or persons and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Agricultural Income-tax Officer in such manner as may be prescribed. " Detailed provisions are made under rule 2 to rule 6 of the Kerala Agricultural Income-tax Rules, 1951, regarding the form and the manner .....

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..... ners required under section 27 of the Agricultural Income-tax Act, 1950, and section 184 of the Incometax Act, 1961, does not contemplate expressly setting out in fractional or other shares. If there is no provision in the partnership deed indicating a contra-intention, it should be taken that the partners are entitled to share the profits equally by applying the provisions contained under section 13 of the Partnership Act. It is also to be presumed that the partners are to bear the losses in proportion to the share of their profits. A further submission is that, for the purpose of ascertaining the individual shares of the partners, it is competent to refer to and rely on materials other than the recital in the deed such as the accounts of the partnership and other connected documents. It is contended on behalf of the applicants in I.T.Rs. Nos. 49 of 1982, 586 of 1985, 4 of 1986 and 40 of 1986, that specification of the individual shares of the partners in the capital is not a requirement at all under section 27 of the Kerala Agricultural Income-tax Act, 1950. Therefore, the view taken by the Commissioner that the firm is not entitled to registration in the absence of specificati .....

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..... ants submit that there is nothing in the recitals in the partnership deed, the relevant portion of which is quoted above, which would go to show that the partners are not entitled to share equally. No minor is admitted to the benefits of the partnership. Therefore, according to the applicants, it is a case where the presumption under section 13(b) of the Partnership Act can be drawn in their favour and they should be treated as sharing the profits earned equally and contributing equally to the losses sustained by the firm. Reliance was placed by the applicants in support of their contention on the decisions of the Supreme Court in Kylasa Sarabhaiah v. CIT [1965] 56 ITR 219, Parekh Wadilal Jivanbhai v. CIT [1967] 63 ITR 485, CIT v. Bagyalakshmi and Co. [1965] 55 ITR 660 and Mandyala Govindu and Co. v. CIT [1976] 102 ITR 1. They also relied on a decision of this court in T. V. Mathew and Sons v. Commr. of Agrl. I T. [1977] 108 ITR 47 and the decisions of the Andhra Pradesh High Court in Addepally Nageswara Rao and Bros. v. CIT [1971] 79 ITR 306, CIT v. Hyderabad Stone Depot [1977] 109 ITR 686 [FB] and CIT v. Krishna Mining Co. [1980] 122 ITR 362 [FB]. Learned counsel appearing on b .....

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..... Kuriakose, party of the first part, shall be entitled for the whole of the profit of Ernakulam office. (b) Sri T.O. Philipose, party of the second part, shall be entitled for the whole of the profits of Kottayam office. (c) Profits or losses of any branch or branches of the firm situated outside Ernakulam and Kottayam shall be shared by Sri T. O. Kuriakose, party of the first part and Sri T. 0. Philipose, party of the second part in the ratio of 55 per cent. and 45 per cent., respectively. " It is contended on behalf of the applicants in the light of the above provisions that it should be assumed that losses are also to be contributed by the partners in the same ratio in which they are to share profits as provided in the deed. Absence of a specific reference to the share in the loss, therefore, shall not be a reason for refusing registration. Learned counsel appearing on behalf of the applicants in I.T.R. Nos. 10 and 11 of 1987 submits that the question referred has to be answered in the negative. According to the learned Special Government Pleader (Taxes) who represented the respondents in I.T.R. No. 49 of 1982, and connected cases, in order to qualify for registration un .....

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..... been defined in section 2(23) of the Income-tax Act, 1961, as having a meaning respectively assigned to them in the Indian Partnership Act, 1932. But, since section 2 starts with the words, " unless the context otherwise requires ", according to learned counsel, reliance cannot be placed on the provisions contained in section 13(b) of the Partnership Act to ascertain the share of loss of the partners even though the firm sought to be registered under section 184 is a partnership as defined under the Indian Partnership Act, 1932. The requirement of an instrument under section 184(1)(i) of the Income-tax Act, 1961, is a deviation from the provisions of the Indian Partnership Act under which a partnership can be formed even under an oral agreement. Learned counsel further proceeds to submit that the insistence of a specification of the shares in profit and loss in the instrument as per the provisions contained in section 184(1)(ii) is also to be treated as a provision derogatory to the provisions of section 13 of the Partnership Act. He made attempts to draw support from the decision of the Supreme Court in CIT v. Bagyalakshmi and Co. [1965] 55 ITR 660. According to learned counsel, .....

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..... ourt. The assessee contended that, if the shares of the partners in the profit of the business are specified in the deed of partnership, it is not necessary to specify the shares in the loss, as the law provides that, in the absence of a contract to the contrary, the loss shall be borne in the same proportion as the profit. A Bench of this court held that, even if the contention taken by the assessee is accepted as a general principle, as per the terms of the partnership deed modified by the clarification deed, the major partners can be treated as liable to bear loss at the rate of 50 per cent. and 25 per cent. in proportion to their share in the profit and the general principle would not be helpful to find out how the balance 25 per cent. of loss is to be shared between the two major partners. In CIT v. Ithappiri and George [1973] 88 ITR 332 (Ker), there was no minor admitted to the benefits of the partnership. There were four major partners and it was provided that the net profit of the business after adjustments, shall be divided among the partners in the ratio of 30 : 30: 20 : 20. There was no provision in the partnership deed about the manner in which the loss of the firm, i .....

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..... nch of this court took the view that the partnership was not entitled to registration as the deed had failed to satisfy the mandatory condition laid down in section 184 of the Income-tax Act, 1961. Reference was made to the Supreme Court decisions in Kylasa Sarabhaiah v. CIT [1965] 56 ITR 219 and Parekh Wadilal Jivanbhai v. CIT [1967] 63 ITR 485 and also to the provisions under section 13(b) of the Indian Partnership Act, 1932. Ultimately, the Bench came to the conclusion by applying the dictum laid down in N. T. Patel's case [1961] 42 ITR 224 (SC) that specification of the individual shares of the partners in the loss being absent in the deed of partnership, registration was correctly declined by the income-tax authorities. It was further held that section 13(b) cannot have any application to the facts of the case. It was observed ( at page 352 " Section 13 as such will apply only when the question arises how the losses are to be borne by all the partners of a firm. When the partnership deed had excluded the liability for loss of one partner, the section cannot apply. Secondly, it is fairly well-established that when profits are to be shared in specified unequal proportions and .....

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..... t is relevant to note that one of the learned judges of the Bench who rendered the above judgment was a party to the judgment in CIT v. Ithappiri and George [1973] 88 ITR 332 (Ker) and United Hardwares v. CIT [1974] 96 ITR 348 (Ker). The latest decision of this court referred to at the Bar is CIT v. Best Automobiles [1979] 117 ITR 877. In the above case, there were two minors admitted to the benefits of partnership. The Bench referred to two earlier decisions of this court on this point, and the decisions of the Supreme Court Sri Ramamohan Motor Service v. CIT [1973] 89 ITR 274 and Mandyala Govindu and Co. v. CIT [1976] 102 ITR I and also to the provisions of section 13(b) of the Partnership Act. Ultimately, the Bench took the view that it is not necessary to resolve the conflict of decisions as, in its opinion, there was no specification of the shares of the loss of the two minors either expressly or impliedly and there was nothing on which the officer could be satisfied that the shares of the minors in the losses had been specified. The above discussion shows that strong reliance was placed on N. T. Patel's case [1961] 42 ITR 224 (SC) by the Benches of this court in taking th .....

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..... oss. In yet another category, there will be provision for sharing profits without specifying the individual shares of the partners and with no provision regarding sharing of loss as in the case of the partnership deed in I.T.R. No. 49 of 1982, and connected cases. Is it the rule that, in all such cases, registration shall be refused to the assessee-firms ? In Kylasa Sarabhaiah v. CIT[1965]56 ITR 219 (SC), the interpretation of the word " specify " in section 26A came up for consideration before a Bench of five judges, and it was held (at page 223 ): " the word 'specify' is used in section 26A and rule 2 as meaning mentioning, describing or defining in detail : it does not mean expressly setting out in fractional or other shares ". In Parekh Wadilal Jivanbhai v. CIT [1967] 63 ITR 485 also the Supreme Court refused to take a strict interpretation of the word " specify " used in section 26A. In clause 3 of the partnership deed which came up for consideration, capital was allotted to each partner equally. Clause (10) stated, " after meeting all expenses, interest and other charges, the resulting net profit or loss shall be ascertained and shall be divided amongst all partners ". It w .....

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..... discernible from the partnership deed itself, it is not open to look into the provisions of other statutes to ascertain the same. The question which arose for consideration in the above case was the eligibility of a firm for registration under section 26A of the Indian Income-tax Act, 1922, where the application was signed not by the partner in person but through his power of attorney holder. It was held that the intention behind the provisions of the Act was that the firm should be given the benefit of section 23(5)(a) only if it was registered under section 26A in accordance with the conditions laid down in that section and the rules framed thereunder. As those rules require the application to be signed by the partner in person, the signature by an agent on his behalf being invalid. The contention raised by the assessee on the basis of the right under common law and section 2 of the Powers of Attorney Act, 1882, to be represented through an agent was not accepted. It was held that the right to apply for the registration of a firm under section 26A was to be determined exclusively by reference to the prescriptions laid down therein. It would be repugnant to the character of such a .....

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..... page 3 "We (the partners) are bound to act according to the above-mentioned stipulations and also according to the provisions of the Indian Partnership Act . . . " The question that arose in the case was whether, in the absence of a specific statement in the instrument as to the proportion in which the partners were to share the losses, the requirement of section 26A could be said to have been satisfied. It was contended by the assessee-firm that section 26A of the Indian Income-tax Act, 1922, did not require specification of the shares in losses in the instrument of partnership and it is sufficient if the proportion in which the losses are to be shared is otherwise ascertainable and that, assuming the section did so require, clause 9 of the instrument satisfied that requirement. Reliance was placed on section 13(b) of the Indian Partnership Act. The Supreme Court, at the outset, rejected the contention of the assessee-firm that, if specific reference to individual shares of the partners in the loss of the firm in the deed of partnership is mandatory, the requirement would be satisfied by making a reference to the provisions contained in section 13(b) of the Partnership Act. .....

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..... ing to Jessel M. R., in Albion Life Assurance Society, In re [1880] 16 Ch D 83, 87 (CA) : "It is said, as a general proposition of law, that in ordinary mercantile partnerships where there is a community of profits in a definite proportion, the fair inference is that the losses are to be shared in the same proportion ", it was held that since the partners were having unequal shares in the profits, there can be no presumption that losses are to be equally shared between them. Reference was also made to the decision of Ramesam J. in Pitchiah Chettiar v. Subramanian Chettiar, AIR 1934 Mad 494; [1935] ILR 58 Mad 25. The above decision considered the scope of section 253(2) of the Indian Contract Act, 1872, which is reproduced in section 13(b) of the Indian Partnership Act, 1932, and it was held that two presumptions are clubbed in one sub-section. The first is, if no specific contract was proved, the shares of the partners must be presumed to be equal. The second presumption is that where the partners are to participate in the profits in certain shares, they should also participate in the losses in similar shares. Even though the section says that both should be in equal shares, it imp .....

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..... . CIT [1973] 87 ITR 57, the Madras High Court took the view that it would be proper for the Department to refer to a plurality of documents for ascertaining the profit-sharing ratio of the partners and refusing to look into other deeds for such ascertainment when there is no dispute about the genuineness of the partnership would be a hypertechnicality with no substance. A similar view was taken by the Bombay High Court in CIT v. Kolhia Hirdagarh Co. Ltd. [1949] 17 ITR 545. On the other hand, the Gujarat High Court has taken the view in Thacker and Co. Ltd. v. CIT [1966] 61 ITR 540 that the shares in the profit and loss have both to be specifically stated in the instrument of partnership in order to comply with the conditions laid down under section 26A of the Indian Income-tax Act, 1922, to obtain registration. CIT v. Krishna Mining Co. [1980] 122 ITR 362, 371 is a decision of a Full Bench of the Andhra Pradesh High Court. Most of the important decisions on the issue, including the decision of the Supreme Court in Mandyala Govindu and Co. [1976] 102 ITR 1, have been referred to in the above case. It was held therein that the specification of the individual shares of the partners .....

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..... the profits. When shares of the individual partners are not actually worked out in the deed, it is open to ascertain the shares by reading the entire instrument as whole and giving it a reasonable interpretation by looking into the accounts and other documents of the firm which would show how the profit or loss had been actually apportioned between the partners and also by taking recourse to section 13(b) of the Indian Partnership Act, 1932. We, therefore, hold, with great respect to the learned judges, that the decisions in CIT v. Ithappiri and George [1973] 88 ITR 332 (Ker) and United Hardwares v. CIT [1974] 96 ITR 348 (Ker), where a contrary view had been taken, are not good law. We also hold that specification of the individual shares of the partners in the capital is not a requirement under section 27 of the Kerala Agricultural Income-tax Act, 1950. I. T Rs. Nos. 49 of 1982, 586 of 1985 and 4 and 40 of 1986: Para 1 of the partnership deed refers to the investment made by the partners in the firm. It is seen from exhibit A-6 proceedings of the Commissioner of Agricultural Income-tax dated March 3, 1969, that sufficent materials were available with the Department to show th .....

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